Recent measures by European policymakers may help fuel a rally in the price of
gold, according to TD Securities strategist Bart Melek. In a note to clients
published on Tuesday, Melek wrote the following: The gold market went into
correction mode at roughly the same time as specs started taking outsized short
euro positions and boosted their gold shorts slightly. The uncertainty
associated with the European sovereign debt crisis was the prime catalyst behind
the move away from the euro and gold. With European governments becoming more
committed to recapitalizing the European banking system and providing a plan to
backstop highly indebted EZ (eur zone) nations, there may be less impetus to buy
dollars in order to build cash positions. The required bond issuance to fund the
European Financial Stability Facility (EFSF) will very likely deepen the euro
bond market and may very well lift euro demand, prompting short covering of euro
positions and depressing the greenback. Gold could very well rally as traders
cover their short euro and gold positions, and as there is less impetus to build
dollar cash balances.
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